1 00:00:00,360 --> 00:00:03,080 Hello and welcome. You are listening to Patrick 2 00:00:03,080 --> 00:00:06,800 Boyle on Finance, a podcast exploring ideas from 3 00:00:06,800 --> 00:00:10,320 quantitative finance, examining events occurring in markets 4 00:00:10,320 --> 00:00:14,080 right now and financial history to see what lessons can be taken 5 00:00:14,080 --> 00:00:17,400 away, including interviews with some of the most interesting 6 00:00:17,400 --> 00:00:20,960 people in the world of finance. To learn more about the podcast, 7 00:00:20,960 --> 00:00:29,200 visit on finance.org. The British government is on the 8 00:00:29,200 --> 00:00:33,520 verge of agreeing to an almost $800 million bailout for Jingyi 9 00:00:33,520 --> 00:00:36,400 Group, the Chinese owners of British Steel. 10 00:00:36,720 --> 00:00:41,400 Rishi Sunak's government already agreed to an almost $700 million 11 00:00:41,400 --> 00:00:45,520 subsidy for Indian owned Tata Steel if they replace their 2 12 00:00:45,520 --> 00:00:48,680 remaining UK based blast furnaces with more 13 00:00:48,680 --> 00:00:51,800 environmentally friendly electric arc furnaces. 14 00:00:52,120 --> 00:00:55,600 These are two of the largest state support packages in 15 00:00:55,600 --> 00:00:58,400 British history. The outgoing Conservative 16 00:00:58,400 --> 00:01:02,320 government didn't sign the Tata deal before the recent election 17 00:01:02,560 --> 00:01:06,480 and the new Labor government has now said that they will make job 18 00:01:06,480 --> 00:01:10,760 guarantees a requirement of any state support package offered to 19 00:01:10,760 --> 00:01:13,640 Tata Steel. Last year, the British 20 00:01:13,640 --> 00:01:18,560 government offered $700 million in subsidies to Tata, the owner 21 00:01:18,560 --> 00:01:22,320 of Jaguar Land Rover, to persuade them to build a new 22 00:01:22,320 --> 00:01:27,040 battery plant in the UK. They agreed to $100 million in 23 00:01:27,040 --> 00:01:31,160 subsidies for German owned BMW to continue building the 24 00:01:31,160 --> 00:01:36,800 electric Mini in the UK and $100 million to Nissan to safeguard 25 00:01:36,800 --> 00:01:40,320 the Japanese owned company's future in the UK. 26 00:01:40,760 --> 00:01:44,560 Do these bailouts and subsidies to foreign owned companies make 27 00:01:44,600 --> 00:01:48,680 any sense for British taxpayers? And if they are paid, can 28 00:01:48,680 --> 00:01:52,800 taxpayers expect these companies to stop coming back for more 29 00:01:52,800 --> 00:01:55,960 government handouts by threatening layoffs again in the 30 00:01:55,960 --> 00:01:59,760 future? Many foreign owned companies do 31 00:01:59,760 --> 00:02:03,400 ask for and get subsidies. But the steel industry is 32 00:02:03,400 --> 00:02:06,880 possibly the most interesting of this group because governments 33 00:02:06,880 --> 00:02:10,560 around the world worry about losing their steel industries, 34 00:02:10,759 --> 00:02:14,320 both for fear of losing manufacturing jobs and for 35 00:02:14,320 --> 00:02:18,360 strategic military reasons. The American Iron and Steel 36 00:02:18,360 --> 00:02:22,200 Institute, for example, highlights on its website that 37 00:02:22,240 --> 00:02:26,320 all segments of the American steel industry contribute to the 38 00:02:26,320 --> 00:02:30,160 defence industrial base. The British steel making 39 00:02:30,160 --> 00:02:34,160 industry has unfortunately been in decline for quite some time, 40 00:02:34,320 --> 00:02:37,960 which is a sad thing to say for the country that invented modern 41 00:02:37,960 --> 00:02:42,640 steel manufacturing. Before 1860, steel was a very 42 00:02:42,640 --> 00:02:46,280 expensive product that was made in small quantities and used to 43 00:02:46,280 --> 00:02:49,480 manufacture precision tools and cutlery. 44 00:02:49,760 --> 00:02:53,800 The Bessemer process developed in England made steel easier, 45 00:02:53,800 --> 00:02:56,200 quicker and cheaper to manufacture. 46 00:02:56,480 --> 00:03:01,920 In 1875, Britain led the world, accounting for 40% of global 47 00:03:01,920 --> 00:03:06,880 steel production, the majority of which was exported. 25 years 48 00:03:06,880 --> 00:03:10,400 later, the United States had become the market leader and 49 00:03:10,400 --> 00:03:14,080 Germany was catching up quickly. The British iron and steel 50 00:03:14,080 --> 00:03:17,240 industry first came under government control during the 51 00:03:17,240 --> 00:03:20,560 Second World War as part of the war effort. 52 00:03:20,800 --> 00:03:24,640 After the war, the Labour Party won a landslide victory and 53 00:03:24,640 --> 00:03:28,760 established an iron and steel board to control the price of 54 00:03:28,760 --> 00:03:32,320 raw materials, finished products, and the development of 55 00:03:32,320 --> 00:03:35,840 new plant and equipment. A few years later they 56 00:03:35,840 --> 00:03:39,840 nationalized the steel industry with the passage of the Iron and 57 00:03:39,840 --> 00:03:42,200 Steel Act. This was reversed by the 58 00:03:42,200 --> 00:03:46,520 Conservative government who were elected in 1951, but the 59 00:03:46,520 --> 00:03:51,640 industry was nationalized once again in 1967 under a Labour 60 00:03:51,640 --> 00:03:56,480 government as British Steel. Under the nationalization in the 61 00:03:56,480 --> 00:04:00,720 60s and 70's, the government's goal was to keep employment as 62 00:04:00,720 --> 00:04:04,560 high as possible, especially in industrial regions. 63 00:04:04,760 --> 00:04:08,960 Many of the steel plants at this time were overstaffed, pay was 64 00:04:08,960 --> 00:04:12,840 higher than average, and British Steel was unprofitable. 65 00:04:13,000 --> 00:04:16,360 It was only able to stay in business because of government 66 00:04:16,360 --> 00:04:20,079 subsidies. In the early 1970's, the British 67 00:04:20,079 --> 00:04:24,240 steel industry employed around 320,000 people. 68 00:04:24,520 --> 00:04:30,800 By 1991 that figure had fallen to just 44,000 workers and today 69 00:04:30,800 --> 00:04:35,640 it employs around 30,000 people. The British steel industry is 70 00:04:35,640 --> 00:04:41,000 today ranked 26th globally and comprises 6 steel mills, four of 71 00:04:41,000 --> 00:04:44,400 which are blast furnaces. According to government 72 00:04:44,400 --> 00:04:48,280 documents, the decline in the steel industry employment can be 73 00:04:48,280 --> 00:04:51,960 explained by increased productivity as fewer workers 74 00:04:51,960 --> 00:04:55,880 are needed in modern factories, but the job losses are mostly 75 00:04:55,880 --> 00:04:59,280 explained by foreign competition, particularly from 76 00:04:59,280 --> 00:05:03,400 China where manufacturing costs are significantly lower. 77 00:05:03,800 --> 00:05:08,320 Britain's new net zero laws mean that the four remaining blast 78 00:05:08,320 --> 00:05:11,920 furnaces, two of which are operated by Tata and the other 79 00:05:11,920 --> 00:05:15,600 two by British Steel, have to be replaced with electric arc 80 00:05:15,600 --> 00:05:18,880 furnaces to reduce their CO2 output. 81 00:05:19,520 --> 00:05:23,160 When the subsidy deal for Tata was announced, the government 82 00:05:23,160 --> 00:05:26,880 said that the new electric furnaces would cut the country's 83 00:05:26,880 --> 00:05:30,920 total carbon emissions by around 1 1/2 percent. 84 00:05:31,600 --> 00:05:35,840 There's been some concern in the UK that as global tensions have 85 00:05:35,840 --> 00:05:39,120 been rising and other countries have focused on supply chain 86 00:05:39,120 --> 00:05:43,160 resilience, that these new, greener furnaces can't make 87 00:05:43,160 --> 00:05:47,240 Virgin steel and instead just recycle steel, which some 88 00:05:47,240 --> 00:05:51,440 industry experts say can't be used for military purposes. 89 00:05:52,240 --> 00:05:55,360 To be clear, Virgin steel has nothing to do with Richard 90 00:05:55,360 --> 00:05:58,200 Branson. It's just primary steel made 91 00:05:58,200 --> 00:06:02,600 from iron ore, while the newer technology is cleaner, more 92 00:06:02,600 --> 00:06:04,840 efficient and requires fewer workers. 93 00:06:05,120 --> 00:06:08,480 Britain, which was once the world's largest steel producer, 94 00:06:08,640 --> 00:06:13,080 may soon become the first major economy with no capacity to make 95 00:06:13,080 --> 00:06:16,680 steel from scratch. One of the biggest arguments in 96 00:06:16,680 --> 00:06:20,760 favour of subsidizing Tata and Jingyi Group, the owners of 97 00:06:20,760 --> 00:06:24,200 British Steel, is that if they were allowed to go bankrupt, 98 00:06:24,400 --> 00:06:27,320 Britain would have no remaining steel industry. 99 00:06:27,520 --> 00:06:32,440 Tata and Jingyi manufacture almost 6,000,000 tons of the 7.2 100 00:06:32,440 --> 00:06:36,240 million tons of steel produced in the UK each year. 101 00:06:36,680 --> 00:06:39,840 Under the current plans, all four of the remaining blast 102 00:06:39,840 --> 00:06:43,720 furnaces will be shut down anyhow while the new electric 103 00:06:43,720 --> 00:06:47,360 arc furnaces are being built, which will take a minimum of 104 00:06:47,360 --> 00:06:50,520 three years, assuming no time overruns. 105 00:06:50,680 --> 00:06:54,120 And in the meantime, Britain will be importing almost all of 106 00:06:54,120 --> 00:06:56,680 it's steel. So one way or another, Britain 107 00:06:56,680 --> 00:07:00,160 will be importing almost all of it's steel over the next few 108 00:07:00,160 --> 00:07:03,400 years. A big part of the pro subsidy 109 00:07:03,400 --> 00:07:07,160 argument is that if these furnaces were permanently shut 110 00:07:07,160 --> 00:07:10,440 down, the UK might be dangerously exposed, 111 00:07:10,440 --> 00:07:14,880 particularly in the case of war. There's even been some press 112 00:07:14,880 --> 00:07:18,720 about how with the upgraded furnaces, Britain could still 113 00:07:18,720 --> 00:07:22,280 find itself in a strategically weak position, as whence the 114 00:07:22,280 --> 00:07:25,800 blast furnaces go away, the country will no longer be 115 00:07:25,800 --> 00:07:30,200 producing virgin steel, meaning steel made from the primary raw 116 00:07:30,200 --> 00:07:34,280 materials. To explain the difference, 70% 117 00:07:34,280 --> 00:07:37,760 of the world's steel is today made using basic oxygen 118 00:07:37,760 --> 00:07:41,800 furnaces, like the ones being shut down, which burn coal to 119 00:07:41,800 --> 00:07:44,600 melt iron ore to extract the iron. 120 00:07:44,840 --> 00:07:47,480 This iron can then be turned into steel. 121 00:07:47,920 --> 00:07:52,600 Most of the inputs to this process are mined raw materials, 122 00:07:52,760 --> 00:07:56,600 and the carbon footprint of virgin steel can be up to five 123 00:07:56,600 --> 00:08:00,520 times greater than the carbon footprint of recycled steel when 124 00:08:00,520 --> 00:08:04,600 you take the carbon intensive nature of mining into account. 125 00:08:05,280 --> 00:08:09,360 The electric arc furnaces, on the other hand, take scrap steel 126 00:08:09,360 --> 00:08:13,080 and use a massive electrical current to melt it down, and 127 00:08:13,080 --> 00:08:17,280 with some processing, the end product is recycled steel, which 128 00:08:17,280 --> 00:08:21,000 has a much lower carbon footprint, according to a blog 129 00:08:21,000 --> 00:08:25,040 post by Ed Conway, the author of the book Material World. 130 00:08:25,200 --> 00:08:28,840 I'll put a link to the book and his blog in the description. 131 00:08:29,240 --> 00:08:32,240 Electric arc furnaces historically produced 132 00:08:32,240 --> 00:08:36,280 significantly worse steel than the virgin steel that comes from 133 00:08:36,280 --> 00:08:40,240 primary steel works. In the past, this recycled steel 134 00:08:40,360 --> 00:08:43,720 was good enough for making things like rebar, which is used 135 00:08:43,720 --> 00:08:47,880 in construction, but was not good enough for advanced uses. 136 00:08:48,520 --> 00:08:51,920 Conway explains that this is no longer the case. 137 00:08:52,080 --> 00:08:55,600 He points out that the steel that goes into aircraft landing 138 00:08:55,600 --> 00:08:59,160 gear, which is apparently one of the finest grades in the world, 139 00:08:59,400 --> 00:09:03,360 is made today in the electric arc furnaces at Rotherham. 140 00:09:03,760 --> 00:09:07,360 The steel used to make nuclear submarines and parts for nuclear 141 00:09:07,360 --> 00:09:11,480 power stations is made by Sheffield Forgemasters, once 142 00:09:11,480 --> 00:09:16,400 again in electric arc furnaces. Conway argues that recycled 143 00:09:16,400 --> 00:09:20,520 steel quality is not a big issue and that the real issue the 144 00:09:20,520 --> 00:09:23,840 manufacturers are struggling with is whether they'll be able 145 00:09:23,840 --> 00:09:27,520 to churn out enough of the relatively cheap rolled steel 146 00:09:27,680 --> 00:09:31,680 which they currently make, which is used in packaging products 147 00:09:31,680 --> 00:09:34,680 like cans. In terms of Britain giving up 148 00:09:34,680 --> 00:09:38,200 its self-sufficiency, Conway points out that virgin steel 149 00:09:38,200 --> 00:09:43,000 making in the UK is already hugely dependent on imports, as 150 00:09:43,000 --> 00:09:47,280 Britain stopped mining iron ore decades ago and already relies 151 00:09:47,280 --> 00:09:50,120 on imports from Sweden, Brazil and Australia. 152 00:09:50,400 --> 00:09:54,520 Additionally, most of the coal used in British steel mills is 153 00:09:54,520 --> 00:09:57,120 imported from Europe and further afield. 154 00:09:57,400 --> 00:10:01,080 He points out that even in the run up to the Second World War, 155 00:10:01,280 --> 00:10:06,040 the UK was heavily reliant on iron ore imports from Sweden, as 156 00:10:06,040 --> 00:10:09,960 was Germany, to manufacture ships and other weapons. 157 00:10:10,520 --> 00:10:14,200 The idea that holding on to blast furnaces for the purposes 158 00:10:14,200 --> 00:10:17,800 of self-sufficiency doesn't seem to hold much water. 159 00:10:18,160 --> 00:10:21,680 According to the Financial Times, the UK produces 10 to 160 00:10:21,680 --> 00:10:25,920 11,000,000 tons of scrap steel each year, the majority of which 161 00:10:25,920 --> 00:10:29,480 is exported, with more than half of it being shipped to Turkey, 162 00:10:29,480 --> 00:10:34,400 Egypt and India for processing. This is considerably more in 163 00:10:34,400 --> 00:10:38,680 exports than the 6,000,000 tons of virgin steel produced in the 164 00:10:38,680 --> 00:10:42,480 UK every year. Based on these figures, it can 165 00:10:42,480 --> 00:10:46,240 be argued that moving from virgin steel production to steel 166 00:10:46,240 --> 00:10:51,040 recycling in fact decreases the UK's reliance on imports. 167 00:10:51,600 --> 00:10:55,040 In terms of the military need for steel, I've no real 168 00:10:55,040 --> 00:10:58,840 expertise on that front and was unable to find figures for the 169 00:10:58,840 --> 00:11:04,000 UK, but in the United States around 3% of steel demand comes 170 00:11:04,000 --> 00:11:08,040 from defence and military end users, with the main uses of 171 00:11:08,040 --> 00:11:11,640 steel being construction and automotive manufacturing. 172 00:11:12,320 --> 00:11:16,240 From a strategic perspective, Western economy should possibly 173 00:11:16,240 --> 00:11:19,760 worry more about critical minerals, which are used in 174 00:11:19,760 --> 00:11:23,600 manufacturing semiconductors and in military and communications 175 00:11:23,600 --> 00:11:29,600 equipment, as China produces 98% of the world's gallium and 60% 176 00:11:29,600 --> 00:11:33,640 of the world's germanium, according to the US Geological 177 00:11:33,640 --> 00:11:37,080 Survey. China began imposing export 178 00:11:37,080 --> 00:11:41,120 restrictions on these critical minerals last year in response 179 00:11:41,120 --> 00:11:45,360 to US controls on sales of chips and chip making equipment, 180 00:11:45,600 --> 00:11:48,240 saying that the export restrictions were needed to 181 00:11:48,240 --> 00:11:52,320 safeguard China's national security and interests. 182 00:11:52,600 --> 00:11:56,640 It's steel is easily procured, but the entire planet relies on 183 00:11:56,640 --> 00:12:00,240 China for critical minerals. It might be more worthwhile to 184 00:12:00,240 --> 00:12:04,720 focus on that supply chain with regard to protecting steel 185 00:12:04,720 --> 00:12:07,800 worker jobs. The transition to more modern 186 00:12:07,800 --> 00:12:12,440 electric arc furnaces is likely to involve layoffs, as these new 187 00:12:12,440 --> 00:12:16,200 furnaces require far fewer workers than the existing blast 188 00:12:16,200 --> 00:12:20,640 furnaces do. So about 5600 jobs are expected 189 00:12:20,640 --> 00:12:24,960 to be lost in the UK just because of the upgrades and I'm 190 00:12:24,960 --> 00:12:28,440 not sure how many steel workers will keep their jobs over the 191 00:12:28,440 --> 00:12:32,480 three or more year period when the plants are being upgraded 192 00:12:32,720 --> 00:12:35,400 for for this reason, British steel workers have been 193 00:12:35,400 --> 00:12:38,520 threatening to strike, saying that they're not just fighting 194 00:12:38,520 --> 00:12:42,240 for their jobs, but fighting for the future of their communities 195 00:12:42,240 --> 00:12:45,920 and the future of steel. The threatened strikes were 196 00:12:45,920 --> 00:12:49,600 suspended when Tata warned that it would bring forward the 197 00:12:49,600 --> 00:12:52,840 planned furnace closures if walk outs went ahead. 198 00:12:53,160 --> 00:12:56,800 So should governments be subsidizing businesses at all, 199 00:12:56,800 --> 00:13:00,440 and in particular, should they subsidized foreign owned firms? 200 00:13:01,200 --> 00:13:04,360 When governments subsidized specific companies with billions 201 00:13:04,360 --> 00:13:08,480 of dollars of taxpayers money and put restrictions in place on 202 00:13:08,480 --> 00:13:12,000 foreign competition, the policies can definitely be 203 00:13:12,000 --> 00:13:15,160 expected to have an effect in the real economy. 204 00:13:15,440 --> 00:13:18,200 But what does the taxpayer get in return? 205 00:13:18,640 --> 00:13:22,320 If the trade interventions generate huge private investment 206 00:13:22,440 --> 00:13:26,120 where factories are built and workers are employed, boosting 207 00:13:26,120 --> 00:13:28,840 the national economy and generating a return on 208 00:13:28,840 --> 00:13:31,760 investment, then the government's gamble will have 209 00:13:31,760 --> 00:13:34,880 paid off. If, on the other hand, you end 210 00:13:34,880 --> 00:13:39,200 up with weak companies and weak industries that can only get by 211 00:13:39,200 --> 00:13:43,640 under continued protection or support, the taxpayer loses out 212 00:13:43,840 --> 00:13:47,320 and either the owners of the subsidized businesses or the 213 00:13:47,320 --> 00:13:51,560 workers in the chosen industries win out at the expense of 214 00:13:51,560 --> 00:13:56,040 society as a whole. AstraZeneca, the British Swedish 215 00:13:56,040 --> 00:14:00,200 pharmaceutical company, recently warned that it might move its 216 00:14:00,200 --> 00:14:03,880 vaccine manufacturing side abroad because of recent 217 00:14:03,880 --> 00:14:07,840 government negotiations to reduce state aid promised for 218 00:14:07,840 --> 00:14:10,640 the project. According to the Guardian, at 219 00:14:10,640 --> 00:14:15,640 least 97% of the funding for the development of the vaccine came 220 00:14:15,640 --> 00:14:18,560 from taxpayers or Charitable Trusts. 221 00:14:18,920 --> 00:14:23,640 According to the FT, AstraZeneca told UK government officials 222 00:14:23,840 --> 00:14:27,040 that they're considering moving the facility to the United 223 00:14:27,040 --> 00:14:30,400 States, where generous government financial support is 224 00:14:30,400 --> 00:14:33,560 offered. Reuters reports that company 225 00:14:33,560 --> 00:14:37,640 bosses in the UK have warned that Britain is falling behind 226 00:14:37,640 --> 00:14:40,760 the United States, which has benefited from the huge 227 00:14:40,760 --> 00:14:45,520 subsidies of Biden's Inflation Reduction Act, and the European 228 00:14:45,520 --> 00:14:49,000 Union, which also has incentive schemes in place. 229 00:14:49,560 --> 00:14:53,480 What's today known as British Steel already went bankrupt in 230 00:14:53,480 --> 00:14:56,520 20/19. It had been bought from Tata 231 00:14:56,520 --> 00:15:01,200 Steel in 2016 as a loss making business by a private equity 232 00:15:01,200 --> 00:15:05,600 firm who paid £1.00 for the business, promising to invest 233 00:15:05,600 --> 00:15:08,120 more. Over the next two years it 234 00:15:08,120 --> 00:15:12,160 flipped to profitability, paying £3,000,000 per year to its 235 00:15:12,160 --> 00:15:16,640 parent company along with 17,000,000 lbs in interest on a 236 00:15:16,640 --> 00:15:18,800 loan. The government gave British 237 00:15:18,800 --> 00:15:25,680 Steel a $152 million loan in 2019 so that it could pay CO2 238 00:15:25,680 --> 00:15:30,080 emissions fees to the EU as it had been excluded from the E US 239 00:15:30,080 --> 00:15:34,400 Carbon Emissions Trading Scheme due to a no deal Brexit. 240 00:15:34,720 --> 00:15:38,160 The company collapsed into bankruptcy just three weeks 241 00:15:38,160 --> 00:15:41,280 later when the British government refused to advance it 242 00:15:41,280 --> 00:15:46,320 an additional $38 million to cover short term financing 243 00:15:46,320 --> 00:15:50,680 needs. We'll be back after a quick 244 00:15:50,680 --> 00:15:52,680 break. It's like our brains have a mind 245 00:15:52,680 --> 00:15:54,040 of their own when it comes to money, right? 246 00:15:54,040 --> 00:15:55,400 Yeah. It's crazy. 247 00:15:55,440 --> 00:15:59,080 We're diving into that today, how our brains really deal with 248 00:15:59,080 --> 00:16:01,360 money. We're going deep on this one, 249 00:16:01,360 --> 00:16:04,720 looking at money and how we decide behavioral research. 250 00:16:05,320 --> 00:16:08,600 This stuff is like eye opening. Seriously, it turns out our 251 00:16:08,600 --> 00:16:11,320 brains aren't always rational, especially with money. 252 00:16:11,600 --> 00:16:13,600 No kidding. So what's the deal with that? 253 00:16:13,600 --> 00:16:16,520 Why are we so bad at making, you know, sensible financial 254 00:16:16,520 --> 00:16:18,320 decisions? Well, our brains are kind of 255 00:16:18,320 --> 00:16:21,040 lazy in a way. They love taking shortcuts. 256 00:16:24,920 --> 00:16:28,880 It was then bought out of bankruptcy by Jingyi Group, it's 257 00:16:28,880 --> 00:16:34,000 current Chinese owners, for £70 million, which is around $92 258 00:16:34,000 --> 00:16:38,000 million. Jingyi agreed to invest $1.6 259 00:16:38,000 --> 00:16:42,720 billion into the business at the time, but only invested $200 260 00:16:42,720 --> 00:16:45,240 million, according to The Telegraph. 261 00:16:45,720 --> 00:16:50,240 They are now asking for an $800 million subsidy, which is a bit 262 00:16:50,240 --> 00:16:54,200 over 2 1/2 times the money that they themselves put into the 263 00:16:54,200 --> 00:16:57,040 business. Earlier this year, Jiny's 264 00:16:57,040 --> 00:17:02,160 auditors, Moore Kingston Smith, unexpectedly resigned just days 265 00:17:02,160 --> 00:17:06,760 after the company released its financial filings for 2021, more 266 00:17:06,760 --> 00:17:10,760 than a year after they were due. This auditor had only been 267 00:17:10,760 --> 00:17:15,599 appointed one year earlier after its predecessor Mazars quit. 268 00:17:16,160 --> 00:17:20,040 More Kingston Smith cited problems with the audit of 269 00:17:20,040 --> 00:17:24,119 inventory such as raw materials and equipment, stating that they 270 00:17:24,119 --> 00:17:28,119 had been unable to satisfy themselves over the existence of 271 00:17:28,119 --> 00:17:34,360 £45.8 million worth of inventory despite trying to verify through 272 00:17:34,520 --> 00:17:38,360 alternative means. They issued a qualified audit 273 00:17:38,360 --> 00:17:41,280 opinion. You really have to question if a 274 00:17:41,280 --> 00:17:45,640 government should provide a huge subsidy far in excess of the 275 00:17:45,640 --> 00:17:49,640 value of the business or what its owners paid for it, to a 276 00:17:49,640 --> 00:17:53,880 company that seems unable to prove the existence of inventory 277 00:17:53,880 --> 00:17:56,000 that they are carrying on their books. 278 00:17:56,680 --> 00:18:01,480 According to Wikipedia, there are 3200 British employees at 279 00:18:01,480 --> 00:18:05,080 British Steel. With an $800 million subsidy. 280 00:18:05,200 --> 00:18:10,360 It would cost the British taxpayer $250,000 per person to 281 00:18:10,360 --> 00:18:14,080 save each job, assuming that Jing Yi doesn't come back 282 00:18:14,080 --> 00:18:19,200 looking for further subsidies. According to UK Steel, the UK's 283 00:18:19,200 --> 00:18:23,120 electricity wholesale price is more than double the cost of 284 00:18:23,120 --> 00:18:27,080 French and Spanish electricity. The British steel industry is 285 00:18:27,120 --> 00:18:31,200 already heavily reliant on electricity and this demand will 286 00:18:31,200 --> 00:18:35,000 only grow as new electric arc furnaces come online. 287 00:18:35,360 --> 00:18:39,080 UK Steel says that with the change, it's expected that the 288 00:18:39,080 --> 00:18:42,520 sector's electricity consumption will roughly double. 289 00:18:43,120 --> 00:18:46,200 Last year, the British government announced measures to 290 00:18:46,200 --> 00:18:50,920 support employers in sectors including steel, metals, paper 291 00:18:50,920 --> 00:18:54,960 and chemicals that are among those most exposed to the high 292 00:18:54,960 --> 00:18:58,920 cost of electricity. Based on these facts, we do have 293 00:18:58,920 --> 00:19:03,280 to question if the UK is even a good place to manufacture steel 294 00:19:03,320 --> 00:19:06,280 at all. If some onshore manufacturing is 295 00:19:06,280 --> 00:19:09,680 needed for military purposes, should the cost of an 296 00:19:09,680 --> 00:19:13,600 appropriately sized steel mill come out of the military budget 297 00:19:13,800 --> 00:19:16,800 rather than the government subsidizing foreign firms to 298 00:19:16,800 --> 00:19:20,320 manufacture steel uneconomically in the UK? 299 00:19:21,000 --> 00:19:24,640 In the British government's own report, they describe how more 300 00:19:24,640 --> 00:19:28,480 steel is being produced globally than there's demand for, and 301 00:19:28,480 --> 00:19:31,480 that a glut of steel has pushed prices down. 302 00:19:31,720 --> 00:19:35,320 It's difficult to justify spending so much taxpayer money 303 00:19:35,320 --> 00:19:39,360 subsidizing an industry that has such a poor outlook. 304 00:19:39,600 --> 00:19:42,920 If there's more supply than demand and you're competing with 305 00:19:42,920 --> 00:19:46,920 subsidized steel from China, at what point can you reasonably 306 00:19:46,920 --> 00:19:50,280 expect to ever see a return on this investment? 307 00:19:51,000 --> 00:19:54,360 To highlight how bad the situation in the steel industry 308 00:19:54,360 --> 00:19:59,080 is, Brazil recently announced quotas and tariffs on cheap 309 00:19:59,080 --> 00:20:03,000 imported Chinese steel. Now, while China does mine some 310 00:20:03,000 --> 00:20:07,280 iron ore, it buys the majority of its iron ore from Australia 311 00:20:07,280 --> 00:20:10,080 and Brazil. The fact that Brazilian steel 312 00:20:10,080 --> 00:20:14,240 mills, where wages are probably not too high, are struggling to 313 00:20:14,240 --> 00:20:18,000 compete on price with competitors who buy their iron 314 00:20:18,000 --> 00:20:23,200 ore in Brazil, ship it 11,000 miles to China, convert it into 315 00:20:23,200 --> 00:20:27,720 steel, and ship the finished good 11,000 miles back to Brazil 316 00:20:27,920 --> 00:20:31,040 tells you that this is not a great business to be in. 317 00:20:31,640 --> 00:20:35,040 It would be easy for me to oversimplify and claim that 318 00:20:35,040 --> 00:20:38,200 there's an obvious solution to these trade problems that we see 319 00:20:38,200 --> 00:20:40,640 today. But very smart people are 320 00:20:40,640 --> 00:20:43,880 working on these problems, and they're likely considering 321 00:20:43,880 --> 00:20:47,400 everything I've brought up in this video and much more. 322 00:20:47,800 --> 00:20:51,920 Milton Friedman argued that exports are the cost of trade 323 00:20:52,080 --> 00:20:54,360 and imports the return from trade. 324 00:20:54,560 --> 00:20:58,320 The only reason to export is to have the money to pay for 325 00:20:58,320 --> 00:21:01,600 imports. He argued that there's no reason 326 00:21:01,600 --> 00:21:05,440 for a country to want to export more than they're importing. 327 00:21:05,640 --> 00:21:07,480 And I think he's right about that. 328 00:21:07,760 --> 00:21:11,920 Unfortunately, this sort of balanced free trade that's based 329 00:21:11,920 --> 00:21:15,400 on the law of comparative advantage is not something that 330 00:21:15,400 --> 00:21:19,720 we've seen in recent decades. As many emerging markets pursue 331 00:21:19,720 --> 00:21:24,720 a strategy of keeping wages low and subsidizing industries so 332 00:21:24,720 --> 00:21:28,760 that they can export far more than they import, sacrificing 333 00:21:28,760 --> 00:21:33,240 profitability for growth, this strategy doesn't make much 334 00:21:33,240 --> 00:21:35,320 sense. It eventually leads to all of 335 00:21:35,320 --> 00:21:37,920 the problems that Japan is dealing with today. 336 00:21:38,240 --> 00:21:42,000 Hugh Hendry has joked that countries pursuing this strategy 337 00:21:42,160 --> 00:21:46,200 are great at generating GDP but not profits, and there's not 338 00:21:46,200 --> 00:21:49,640 much point in that. Michael Pettis recently wrote in 339 00:21:49,640 --> 00:21:53,720 the FT that the global trading system has long diverged from 340 00:21:53,720 --> 00:21:57,120 one in which countries specialize and benefit from the 341 00:21:57,120 --> 00:22:00,840 comparative advantage based trade that economists talk 342 00:22:00,840 --> 00:22:02,880 about. The theory of comparative 343 00:22:02,880 --> 00:22:07,280 advantage says that the global economy benefits when different 344 00:22:07,280 --> 00:22:10,360 countries specialize in the products they can produce 345 00:22:10,360 --> 00:22:14,640 comparatively more efficiently, exchanging them for products 346 00:22:14,640 --> 00:22:18,520 that other countries can produce comparatively more efficiently. 347 00:22:19,120 --> 00:22:22,560 Pettis points out that it's a lot trickier to trade with 348 00:22:22,560 --> 00:22:26,440 countries who are willing to dump goods abroad below their 349 00:22:26,440 --> 00:22:29,880 cost of manufacture, as while you're getting cheap goods, 350 00:22:29,880 --> 00:22:34,240 which is a win, if they persist long enough, your industry can 351 00:22:34,240 --> 00:22:37,840 be wiped out. This isn't a smart strategy from 352 00:22:37,840 --> 00:22:40,960 the exporting countries perspective either, as 353 00:22:40,960 --> 00:22:44,360 eventually they may end up with the biggest factories in the 354 00:22:44,360 --> 00:22:49,160 world, but if their trade policy cause unemployment abroad, they 355 00:22:49,160 --> 00:22:52,760 find themselves having sold goods on credit to customers who 356 00:22:52,760 --> 00:22:56,400 can't pay them and who are no longer buying more goods. 357 00:22:56,720 --> 00:22:59,480 Everyone loses in such a situation. 358 00:23:00,160 --> 00:23:04,120 Almost all economists support free trade based on comparative 359 00:23:04,120 --> 00:23:07,960 advantage, as this maximizes the value of goods and services 360 00:23:07,960 --> 00:23:11,920 produced by the global economy. But Pettis argues that the 361 00:23:11,960 --> 00:23:15,840 excess savings and persistent trade surpluses that we see 362 00:23:15,840 --> 00:23:19,760 today are not signs of comparative advantage based 363 00:23:19,760 --> 00:23:23,960 trade or signs of a healthy system of international trade. 364 00:23:24,280 --> 00:23:28,120 He argues that the current global trade regime subjects 365 00:23:28,120 --> 00:23:32,920 deficit economies like the US to an industrial policy, but not 366 00:23:32,920 --> 00:23:36,000 one of their choosing. Instead they end up with the 367 00:23:36,000 --> 00:23:39,520 obverse of the industrial and trade policies of their most 368 00:23:39,520 --> 00:23:43,400 aggressive trade partners. Over the last few decades, 369 00:23:43,600 --> 00:23:46,520 globalization has brought down the price of goods. 370 00:23:46,680 --> 00:23:50,680 For example, 50 years ago you couldn't buy AT shirt for the 371 00:23:50,720 --> 00:23:54,640 inflation adjusted dollar that you can do today and have it 372 00:23:54,640 --> 00:23:58,320 shipped to your house for free. I don't agree with subsidizing 373 00:23:58,320 --> 00:24:01,840 manufacturing, especially in industries like steel where the 374 00:24:01,840 --> 00:24:06,160 UK has no competitive advantage today and it's not clear that 375 00:24:06,160 --> 00:24:09,320 one will appear in the near future, especially when the cost 376 00:24:09,320 --> 00:24:13,680 of electricity and raw materials is so much higher in the UK than 377 00:24:13,680 --> 00:24:17,240 it is abroad. The recent slowdown in China has 378 00:24:17,240 --> 00:24:21,080 meant even lower Chinese consumption, and because the 379 00:24:21,080 --> 00:24:25,200 same amount of goods are being produced, the surplus is just 380 00:24:25,200 --> 00:24:28,920 being exported. The recent increase in exports 381 00:24:28,920 --> 00:24:32,320 from a country that was already a huge exporter has LED 382 00:24:32,320 --> 00:24:36,440 politicians around the world to implement protectionist measures 383 00:24:36,600 --> 00:24:40,320 to defend local industry. We're seeing this with electric 384 00:24:40,320 --> 00:24:44,400 vehicles where the United United States, Canada and the EU have 385 00:24:44,400 --> 00:24:47,440 all increased tariffs on Chinese EVs. 386 00:24:47,680 --> 00:24:51,600 Britain has not done this yet, likely because in the post 387 00:24:51,600 --> 00:24:55,760 Brexit environment they don't want China imposing tariffs on 388 00:24:55,760 --> 00:24:58,960 British goods. Britain already has enough trade 389 00:24:58,960 --> 00:25:02,720 problems to deal with. The long downturn in the British 390 00:25:02,720 --> 00:25:06,240 steel industry is part of a broader decline in industry and 391 00:25:06,240 --> 00:25:10,520 manufacturing that many argue played a big role in reshaping 392 00:25:10,520 --> 00:25:15,840 politics, leading to the UK's vote to leave the EU in 2016. 393 00:25:16,280 --> 00:25:20,160 A British government research report describes steel as being 394 00:25:20,160 --> 00:25:24,240 an intensively traded product where a glut of steel on global 395 00:25:24,240 --> 00:25:28,000 markets has depressed its value. It says that governments 396 00:25:28,000 --> 00:25:32,360 participating in the OECD Steel Committee consider excess 397 00:25:32,360 --> 00:25:35,880 capacity as being one of the main challenges facing the 398 00:25:35,880 --> 00:25:40,120 global steel sector today. It goes on to say that steel 399 00:25:40,120 --> 00:25:43,320 industries are often heavily subsidized by national 400 00:25:43,320 --> 00:25:47,080 governments, resulting in production levels are exceeding 401 00:25:47,200 --> 00:25:50,280 what the market needs would otherwise dictate. 402 00:25:50,920 --> 00:25:55,160 In such a situation and in such a competitive environment, would 403 00:25:55,160 --> 00:25:58,160 it be better for the British government to allow the steel 404 00:25:58,160 --> 00:26:01,400 mills to just fall into bankruptcy with their foreign 405 00:26:01,400 --> 00:26:05,000 owners taking the loss? If it makes economic sense to 406 00:26:05,000 --> 00:26:09,480 build new electric arc furnaces, a new company could step in to 407 00:26:09,480 --> 00:26:12,040 do this. I'm not sure that the existing 408 00:26:12,040 --> 00:26:15,240 management are needed. It doesn't sound like a great 409 00:26:15,240 --> 00:26:17,600 business opportunity to me at present. 410 00:26:17,800 --> 00:26:20,920 So there's a good chance that left alone, the steel mills 411 00:26:20,920 --> 00:26:24,160 would just shut down. But at least it wouldn't involve 412 00:26:24,160 --> 00:26:28,360 taxpayers providing a subsidy to foreign firms greater than the 413 00:26:28,360 --> 00:26:31,480 foreign firms own investment in their own businesses. 414 00:26:32,160 --> 00:26:35,440 I will of course be interested to hear my viewers thoughts in 415 00:26:35,440 --> 00:26:38,680 the comments section. International trade is a very 416 00:26:38,680 --> 00:26:42,160 complex topic and a topic that affects the lives and 417 00:26:42,160 --> 00:26:46,200 livelihoods of many people and we do have to keep that in mind. 418 00:26:46,480 --> 00:26:48,880 Thanks for tuning into this week's podcast. 419 00:26:49,080 --> 00:26:51,880 A special thanks to my supporters on Patreon whose 420 00:26:51,880 --> 00:26:54,880 contributions make this podcast possible. 421 00:26:55,080 --> 00:26:57,520 Have a great week and talk to you again soon. 422 00:26:57,760 --> 00:27:00,920 Bye. If you enjoyed this episode, be 423 00:27:00,920 --> 00:27:03,800 sure to subscribe so you're notified when a new episode is 424 00:27:03,800 --> 00:27:06,040 posted. Thank you to everyone who is 425 00:27:06,040 --> 00:27:08,120 supporting this content on Patreon. 426 00:27:08,480 --> 00:27:11,360 If you enjoyed this content, you can find more like it on 427 00:27:11,360 --> 00:27:15,880 YouTube, on the Patrick Boyle on Finance channel, or follow us on 428 00:27:15,880 --> 00:27:19,080 Twitter at Patrick E Boyle. Thanks for listening. 429 00:27:19,080 --> 00:27:19,520 Bye.